In simple terms, a loan modification is the basic modification of an existing loan. It is the lenders response to the borrower’s inability to repay the loan over a period of time. This modification could include a change in either one or more of the terms of borrower’s loan. A loan modification allows the terms of the entire loan to be reinstated and allows the borrower to switch to a loan that is affordable.
Generally, a loan modification is allowed only once within a period of 24 months i.e. a loan can be modified only once in two years. In order to be eligible for a loan modification, the borrower has to satisfy a certain financial criteria. This includes
- The borrower has gone through a significant loss of income or increase in living expenses.
- One or more of the borrowers has an inflow of “continuous income”. This could be in the form of employment (salary, wages, profit) social security, disability, veteran benefits, child support, survivor benefits or pensions.
- The borrower has a surplus income of at least $300 or 15% of the borrower’s monthly income.
- Surplus debt cannot be cured within six months using 85% of the borrower’s surplus income.
- The monthly payment on the mortgage (PITI – Principle, Interest, Tax and Insurance) can be brought down by 10% of the original monthly payment amount and $100, using the current rate in the market and amortization of the new loan over 30 years.
- The borrower has been successful in completing a 3 month trial on the new reduced payment amount or in the cases of imminent default, the borrower has been successful in completing a 4 months trial.
- The borrower has not received a Loan Modification in the recent past (24 months).